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XIV Is Just the Tip of the Iceberg for This Hedge Fund Investor

(Bloomberg) -- After one of its best months ever in January, February took a turn for the worse for this hedge fund picker.

RPM Risk & Portfolio Management, which manages funds of hedge funds, had a return of 13 percent in January for its Evolving CTA Fund. But at the end of the month RPM took down risk after its key indicators showed that a selloff could come.

And a selloff did come. Increased volatility has sent shock waves through the markets, with Credit Suisse Group AG liquidating one inverted volatility investment product. Stock markets have plunged, with key indexes down more than 2 percent across the globe so far this year.

“The inverted VIX products are just the tip of the iceberg,” Per Ivarsson, head of investment management at RPM, said by phone from Stockholm on Wednesday. “The low volatility isn’t sustainable. It’s too early to say but this could be what signals that the rubber band is about to break.”

What’s “disturbing” is that many asset prices, such as stocks and real estate, are inflated by “cheap money” while growth expectations are low. It isn’t a sound foundation for high valuation of anything, Ivarsson said.

RPM’s internal indicator, called Coordinated Market Sell-Off, was at “extreme levels”, according to Ivarsson, who oversees about $400 million.

“The sell-off indicator is still on a high reading but coming down,” he said. “The managers have also reacted by taking down the risk. Positioning has come down and the managers are basically flat equities at the moment and if stock markets continue down they will be short stocks very soon”.

The Evolving CTA Fund invests 50 to 70 percent in trend-following Commodity Trading Advisor funds with the rest split between short-term and fundamental CTAs. The fund holds long positions in EU bonds, gold and crude oil, and short positions in U.S. bonds and the U.S. dollar. The return year-to-date is up 3.2 percent as of February 7.

While the fund, especially the trend-followers, has taken a hit, volatility may create more opportunities for the managers, according to Ivarsson.

“It’s a better environment for CTAs,” he said. “There’s more going on. Volatility is needed but it must be directional volatility. This can set off some movements that can be beneficial for CTAs in the medium to long term.”